What is a chattel mortgage?
A chattel mortgage is a type of secured business finance commonly used to buy vehicles or other business equipment. With a chattel mortgage, the asset being purchased (known as the ‘chattel’) is registered as security for the loan (mortgage).
This means the lender can reclaim the asset if you default on the loan. The lender must also register their interest in the vehicle or asset on the Personal Property Securities Register (PPSR) until you pay off the loan.
Sole traders and small businesses often use a chattel mortgage to finance vehicles required for work, often due to the tax deductions they offer over a standard car loan. A chattel mortgage can also be known as a goods loan, business car loan or commercial car loan.
How does a chattel mortgage work?
A chattel mortgage works similarly to secured car loan, but for business customers. To qualify, the vehicle must be used at least 51% of the time for business.
With a chattel mortgage, you borrow a lump sum (from $10,000 to $1,000,000+) from a lender to buy a new or used vehicle or piece of business equipment.
You then repay the loan in instalments, with interest, over a fixed term of 1-7 years. Your business has full ownership of the asset from the outset and is responsible for all upkeep and management costs.
Chattel mortgage interest rates start from 7.50% p.a. (for prime business borrowers) depending on the lender, and are usually fixed for the life of the loan.
Benefits and disadvantages of a chattel mortgage
Pros
- Lower interest rates than unsecured business loans.
- Option to include a balloon payment to lower monthly repayments.
- Finance costs may be tax deductible.
- Depending on the loan, you may have the flexibility to repay your chattel mortgage early if you can afford extra repayments.
Cons
- The lender could reclaim the asset if you default on the loan, potentially impacting your business credit rating and operations.
- Opting for a balloon payment at the end of the finance term means you pay more interest overall.
- If you don't have a lump sum to pay your balloon payment, you might need to refinance the balloon amount into a new loan (and pay more interest).
According to Money borrower data, the average chattel mortgage amount requested is $58,706 for vehicles and $181,434 for machinery or equipment.
Assets can you finance with a chattel mortgage
You can generally get a chattel mortgage for business vehicles up to 4.5-5 tonnes (depending on the lender) and any business assets with a serial number. Here’s a breakdown of the different asset classes or ‘tiers’ you can purchase with a chattel mortgage.
- Light vehicles (Tier 1) Sedans SUVs Work vans Work utes Motorcycles Heavy vehicles (Tier 2)
- Trucks Buses Specialised vehicles (e.g. refrigerated vans, food trucks) Trailers Yellow goods (e.g. excavators, diggers) Farming & agriculture (e.g. tractors, harvesters)
- Business machinery or equipment (Tier 3) Warehousing equipment (e.g. forklifts, conveyors) Manufacturing equipment Landscaping equipment Office & IT equipment
- Specialised equipment (Tier 4) Commercial kitchen equipment (including appliances) Gym equipment Security systems ATMs Vending machines
Who’s eligible for a chattel mortgage?
Eligibility requirements for a chattel mortgage will vary between lenders, but generally include:
- Australian citizenship or permanent residency
- An active ABN or ACN
- GST-registered and at least six to 12 months of trading history
- You must be able to provide bank statements and other proof of eligibility
- A good credit score — the minimum credit score for business lending is around 475 (it could be less if you own a home)
- You must be purchasing an asset that’s eligible to act as security under a chattel mortgage (age limits and other criteria may apply)
Requirements for a chattel mortgage application
Established business
Minimum trading history: More than five years
Financial documents required: Two years of financials + three months of bank statements
Specific requirements: Financials must be prepared by an accountant
Business with low documentation
Minimum trading history: More than two years
Financial documents required: Latest BAS statements plus three months of bank statements
Specific requirements: Must be a homeowner or have a 10% deposit
New business/startup
Minimum trading history: Less than two years
Financial documents required: 12 months of cash flow projections (prepared by an accountant) + three months of bank statements
Specific requirements: Must be a homeowner or have a 10% deposit
Sole trader
Minimum trading history: Up to two years
Financial documents required: Two payslips and three months of bank statements
Specific requirements: Payslips may show ability to repay the loan
Chattel mortgage GST & tax benefits
The interest charged on a chattel loan may be tax-deductible as a business expense. If your business is registered for GST, you may additionally be able to claim a credit for the GST paid on the initial purchase of your business vehicle/asset.
This can be claimed as what’s called an input tax credit on your Business Activity Statement (BAS) for the relevant period, according to the ATO.
- If you’re buying a vehicle, the GST credit you can claim is capped at 1/11th of the car limit for depreciation set by the ATO each year.
- For 2024-25, the car limit for depreciation is $69,674.
- The maximum amount of GST you can claim during that year is 1/11th of that cost limit — $6,334.
- If the vehicle is used for both business and private use, you will need to calculate the breakdown of each for tax purposes, as only the business use portion will be eligible for a deduction or GST tax credit.
Example of claimable GST on a chattel mortgage
Purchase price | |
Vehicle 1 | $50,000 |
Vehicle 2 | $100,000 |
Claimable GST credit | |
Vehicle 1 | $4,545 (full GST credit) |
Vehicle 2 | $6,334 (1/11th of ATO car limit) |
| Vehicle 1 | Vehicle 2 | |
|---|---|---|
Purchase price | $50,000 | $100,000 |
Claimable GST credit | $4,545 (full GST credit) | $6,334 (1/11th of ATO car limit) |
How to apply for a chattel mortgage
1
Compare chattel mortgage lenders & interest rates
‘Shop the rates’ between bank and non-bank lenders through a finance broker. They will be able to show you indicative chattel mortgage rates and fees, plus features from different lenders. Comparing options in this way shouldn’t impact your credit report. Keep in mind that your individual rate usually ends up being different to the lender’s advertised rate.
2
Prepare your documentation
Gather your bank statements from the last six to 12 months, and your business registration and tax information (e.g. BAS statements, tax returns). Having this ready can be the difference between getting approved on the same day or in a few days. If you’re a relatively new small business borrowing more than $150,000, the lender may require financials prepared by an accountant.
3
Submit your application
Most lenders have an online application portal you can submit your chattel mortgage application through. You’ll be asked to submit your financial paperwork at this stage, along with any other relevant business information. The lender will also run a business credit check before processing your application to the final stage.
4
Get your chattel mortgage approved
If you’re still shopping for your business vehicle or asset, the lender may grant conditional approval. If you’ve already found your vehicle or equipment, the lender will check it meets the lending requirements. If it does, your chattel mortgage will be unconditionally approved, and the lender will release the funds.
What factors could help get your chattel mortgage approved?
Shaun McGowan, Loans Expert
“Generally speaking, business owners who own residential property and have a healthy trading history are in the strongest position when applying for a chattel mortgage. You may just need to provide a rates notice along with your business financials. Small businesses with a limited trading history can still qualify for a chattel mortgage, but may be asked to provide additional security like a deposit.”
Shaun McGowan, Loans Expert
Should you get a chattel mortgage with a balloon payment?
Depending on the lender, you may have the option to include a balloon payment as part of your chattel mortgage. This is a lump-sum residual repayment due at the end of your loan term to pay the remaining loan balance. The balloon payment can range from 20-40% of your loan amount depending on how your finance is structured.
Opting for a balloon payment option reduces your regular repayments which can help preserve cash flow, although you’ll owe a larger sum at the end of the loan term. A balloon payment usually means overall interest costs on a chattel mortgage will be higher.
Chattel mortgage with & without balloon payment
Loan amount | |
Chattel mortgage with balloon payment | $80,000 |
Chattel mortgage without balloon payment | $80,000 |
Claimable GST credit | |
Chattel mortgage with balloon payment | $4,545 (full GST credit) |
Chattel mortgage without balloon payment | $6,334 (1/11th of ATO car limit) |
Loan term | |
Chattel mortgage with balloon payment | 5 years |
Chattel mortgage without balloon payment | 5 years |
Interest rate | |
Chattel mortgage with balloon payment | 8% |
Chattel mortgage without balloon payment | 8% |
Balloon payment | |
Chattel mortgage with balloon payment | $16,000 (20% of loan amount) |
Chattel mortgage without balloon payment | $0 |
Monthly repayment | |
Chattel mortgage with balloon payment | $1,404 |
Chattel mortgage without balloon payment | $1,622 |
Total interest payable | |
Chattel mortgage with balloon payment | $20,261 |
Chattel mortgage without balloon payment | $17,327 |
Total to be repaid | |
Chattel mortgage with balloon payment | $100,261 |
Chattel mortgage without balloon payment | $97,327 |
Cost difference | |
Chattel mortgage with balloon payment | +$2,934 |
Chattel mortgage without balloon payment |
| Chattel mortgage with balloon payment | Chattel mortgage without balloon payment | |
|---|---|---|
Loan amount | $80,000 | $80,000 |
Claimable GST credit | $4,545 (full GST credit) | $6,334 (1/11th of ATO car limit) |
Loan term | 5 years | 5 years |
Interest rate | 8% | 8% |
Balloon payment | $16,000 (20% of loan amount) | $0 |
Monthly repayment | $1,404 | $1,622 |
Total interest payable | $20,261 | $17,327 |
Total to be repaid | $100,261 | $97,327 |
Cost difference | +$2,934 |
What happens at the end of a chattel mortgage?
After repaying your chattel mortgage, you’ll have unconditional ownership of the vehicle and the asset will be removed from the PPSR. If there’s a balloon payment at the end of the finance term, you could:
1
Pay the residual balloon and keep or sell the asset as you wish
2
Refinance the balloon amount into a new loan and pay it off in regular instalments (with interest)
3
Trade your asset to purchase another with a new finance agreement, repaying the balloon amount in the process (generally using the proceeds from the trade-in).
Chattel mortgage fees
A chattel mortgage generally comes with various fees which can impact the overall cost of your finance. Here are some common chattel mortgage fees to watch out for:
Establishment fee: $150- $550
Documentation fee: $150-$495
Monthly account keeping fee: $0-$10
Early payout fee: $0-$450
Fees can have a significant impact on your chattel mortgage costs, so take a look at your lender’s fees before deciding if a finance product is right for you.
As an illustration, an $8 monthly account keeping fee would total $480 over a five-year loan period, whereas a $10 monthly account maintenance fee would amount to $600.
Top 5 industries requesting a chattel mortgage
Here are the top five industries in Australia applying for chattel mortgages along with the average loan amount requested for each, based on thousands of loan requests submitted through Money.com.au.
- Building & construction ($84,608)
- IT services ($63,397)
- Cleaning services ($42,421)
- Agriculture ($82,562)
- Electrical & lighting ($55,113)
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